Will we pivot from macro to micro this year?
John Kolz: I think the pivot from macro to micro is happening now. Our engagement with corporates is high and more investors are asking about companies and sectors at a micro level. This is also still a market where human emotion and confidence matters – those signals are strong. We had a fierce debate on macro interest rate policy, among other things, in 2023; despite that, the markets are mostly optimistic for the start of 2024.
Nitin Babbar: It’s encouraging. Macro volatility was startling in 2023, but central banks acted decisively, creating a stable, manageable rate environment for investors to seek returns. Now, the micro matters. We need earnings growth to expand markets and management teams to deliver growth and maintain tight margins in a high inflation tail. We need free cashflow and earnings to attract bids for stocks.
Kolz: I would also add that M&A has driven many of the biggest equity market transactions this year. Most of the few US IPOs this year were corporate carve outs. Portfolio optimization through M&A or divestitures will be another macro-micro driver of activity in all our markets.
Duncan Smith: Macro has dominated for too long in Europe too, making it hard for stock pickers to stand out. A return to micro is key for an ECM recovery to help active managers differentiate and perform better in a passive-investing environment.
Justin Grimmond: At a macro level, we expect the Australian economy to stay resilient, which is good for market sentiment and ECM activity. With a more stable interest rate environment, ASX investors can do more fundamental analysis allowing them to focus on revenue quality and margins.
Will the year ahead bring more breadth and balance to equity markets?
Kolz: If I look at not only potential but actual deals we’re working on, I see a number of healthy dynamics, particularly the balance of transactions that are not just in tech or healthcare, but also in financials, consumer, retail. That breadth of activity is good for the market.
Smith: That balance and breadth applies to the European pipeline too. We’re seeing a broader range of companies and owners looking to access equity capital markets. It has breadth both in sectors and in terms of business maturity. Equity markets love high growth, but they also like mature businesses with market leadership that offer defensive growth.
"The European pipeline now has balance and breadth. The markets love high growth, but they also like mature businesses with market leadership that offer defensive growth."
Duncan Smith, Co-Head, Head of European Equity Capital Markets
We’re also seeing more transactions with cornerstone or anchor investors already in place. That’s been a natural and helpful response to a tougher market that can be applied in 2024, even as we expect the environment to improve.
"Going public now needs to be a strategic decision, not an opportunity for monetization."
Nitin Babbar, Global Co-Head, Equity Capital Markets
Babbar: One other observation that I would make now is that it should also be a strategic decision to go public. Not just an opportunity for monetization, but a strategic move to grow the business, to have public currency and to create value for shareholders.
How important will Financial Sponsors be to equity markets this year?
Kolz: Financial sponsors are going to be crucial in 2024. The market prefers balanced growth and profitability, which is what PE firms offer. They own profitable companies that they leverage and grow through organic or M&A strategies that are ready for a fair valuation and market receptivity. And they avoid hypergrowth companies that promise future profits, which the market dislikes now.
"I think the pivot from macro to micro is happening now. Our engagement with corporates is high and more investors are asking about companies and sectors at a micro level. This is also still a market where human emotion and confidence matters – those signals are strong. We had a fierce debate on macro interest rate policy, among other things, in 2023; despite that, the markets are mostly optimistic for the start of 2024."
John Kolz, Global Co-Head, Equity Capital Markets
PE firms have also been using every tool to creatively access the markets – derivatives, margin loans, and call options to monetize their public and private positions. That has been useful to reopening the markets in a positive, constructive way.
Grimmond: A pipeline of PE-owned IPO candidates is building up in Australia too. Many sponsors plan to exit in the next 12 to 18 months and we are discussing IPOs and dual track processes. Sponsors know that they will face more scrutiny on valuations when they go public. This has been a key obstacle for IPOs in Australia recently. The pricing and valuation gaps are narrowing as the market normalizes in Australia, but could still create complexities as IPO activity picks up.
"The pricing and valuation gaps are narrowing as the market normalizes in Australia, but could still create complexities as IPO activity picks up."
Justin Grimmond, Head, Equity Capital Markets, Australia
Smith: Financial sponsors are vital in our European market too. UK equity markets have been undervalued for various reasons and sponsors have seized that opportunity and led the take private and M&A activity this year. They also own some high quality, large businesses in Europe that match the profile of defensive growth, profitable growth, and market leadership. These are the businesses that we think will attract public market investors.
How is the ECM playbook evolving?
Kolz: There’s now a real focus on having broad buy-side participation that changes the historical ECM playbook. If we were self-critical, we would say that some of the past execution tactics are no longer suitable and some of the 2023 IPOs showed the flaws of having an outdated playbook for the current markets. So, we have to evolve. We are not tied to any of the old tactics. We are creative and try things that work based on real market intelligence, investor connectivity and advice to our clients.
What factors led to recent changes in the convertibles market?
Babbar: What used to be a growth-focused financing option for tech and healthcare firms became a cost-saving strategy for big and high-quality companies. It’s been a remarkable shift in the convertibles market.
Kolz: In 2023 we will end with about $50 billion of convertible issuance, up from around $25 billion in 2022. I think 2024 will be a very good year for convertibles, as both the traditional users of the market (tech and healthcare companies that need growth capital) and the new entrants (investment grade companies that can lower their financing costs by using convertibles) can take advantage of the market conditions.
We also see more sectors that were not big users of convertibles in the past, such as energy, power and utilities, financials, REITs, and industrials, joining the market. In addition, we see more opportunities for using derivatives, such as covered calls, to monetize volatility and enhance returns. Using convertibles, derivatives, and all the related strategies will be an important component of 2024.
How do industry and sector trends vary across different regions?
Grimmond: The resources sector, especially the critical mineral sector, was the main driver of Australia’s issuance in 2023, representing 30% of total ASX ECM activity. China’s demand will be a key factor for the mining space in 2024. The tech sector, which had a tough 18 months, is seeing renewed interest, especially in AI, digital infrastructure, and software companies.
Kolz: The US sector activity in 2023 was well distributed among tech, healthcare, energy, and others, but with less issuance overall. The real estate sector was missing, due to interest rates, and industrials had a big backlog of high quality firms, mostly financial sponsor owned. A potential lever for issuance was artificial intelligence, which is a hot topic for investors. Current winners, like Nvidia and Microsoft, may face competition from new entrants that could take market share and issuance volume. We’ll see how that plays out in other trends.
Babbar: Canada’s markets will be driven by infrastructure and resources, just like Australia’s, but the uses are changing dramatically. Copper is for battery tech, not housing, and we see more investor interest from generalists in energy transition now, not just specialists. We also think that utilities and real estate will recover with the market
Smith: If you look across the European pipeline, consumer and technology services are well-represented, but also industrials, healthcare, and financial services. So there is a healthy balance – that word again – of sectors and structures. Another thing is the number of carve outs in 2023, with large European firms refining their equity story and business focus, and giving subsidiaries opportunities to track their own path. We expect more of that in 24 and beyond.
Kolz: I do feel investor sentiment is encouraging for 2024. They say cash from the US year-end rally will go into mutual and hedge funds, which signals demand and confidence for potential deals and an interest in engaging with companies.
Of course, we also need to monitor what’s coming up in 2024. We have elections in the US, Europe, and elsewhere. We will navigate that and hope for normal issuance volumes. Election years don’t necessarily lower issuance volumes, but they make preparation and timing windows even more important. Being ready for those open windows will be key this year.
